Sunday, June 14, 2009

Big, Interconnected, & Risky

Larry Summers, President Obama's Chief Economic Adviser, said the following to the Council on Foreign Relations:

"Any financial institution that is big enough, interconnected enough or risky enough that its distress necessitates government writing substantial checks, is big enough, risky enough or interconnected enough that it should be some part of the government's responsibility to supervise it on a comprehensive basis."

Supervision? Recall this is the same private sector Larry Summers who suggested sovereign wealth funds should be regulated. That's nowhere to be seen, now that Larry is serving the public again.

Private equity underwriters look to get a free pass, like their foreign government funded siblings. Yet, PEU affiliates repeatedly show up for federal capital. The Carlyle Group's David Marchick testified before a Senate Committee on the need to shore up manufacturing firms, even those owned by cash heavy PEU's.

The FDIC is changing rules to allow private equity to invest hundreds of billions in failing financial institutions. Rather than PPIP for toxic assets, Obama/Geithner/Bair plan to sell bad banks. Purchase accounting and billions in FDIC subsidy should wash bad financial products through quite profitably.

If it's like BankUnited, the FDIC will wipe out shareholders in favor of the PEU boys. Carlyle and company got $4.9 billion in subsidy from the FDIC, with no executive compensation restrictions. As a nonpublic company, the new BankUnited will focus on commercial accounts. How many Carlyle affiliates switched banking institutions?

Is there a game between the feds and PEU's? You fund my bank, I'll help your affiliate. The NYT reported:

Rental car companies were pushing the Fed to finance their fleets. Hertz, which is owned by two private equity firms — the Carlyle Group and Clayton, Dubilier & Rice — hired Mr. Eizenstat to make its case.

In trying to persuade the Fed to relax its loan terms, Mr. Eizenstat led delegations of Hertz officials to both the Treasury and the Fed. They reached out to Ron Bloom, the co-chairman of the Treasury Department’s auto task force, as well as to top aides to Mr. Geithner. They also made detailed financial presentations to Fed officials in Washington and New York.

While the Fed so far has denied Hertz’s requests to relax loan terms, some of the lobbying appears to have worked. In March, the Fed announced that it would purchase loans used to buy light trucks and recreational vehicles. It also said that it would finance equipment leasing deals, rental car fleets and “floor plan” loans, which car and R.V. dealers use to finance showroom vehicles.

Larry Summers also said to CFR:

"If you give people enough leverage, they can lose an unbelievably large amount of their own money and that of their clients."

The Carlyle Group lost Carlyle Capital Corporation, Blue Wave Partners, SemGroup, Hawaiian Telecom, and Edscha. It's on the verge of losing IMO Carwash. Private equity is not risk free.

The quickest way to lose client money is derivatives, many of which are risky credit bets. They aren't going away anytime soon. Neither is opaque trading of energy futures. Betting and speculation remain on the table, open to manipulation from the big money boys.

The new rule is the same as the old. He who funds those in power makes and enforces the rules. Bush looked out for his friends time after time, at the expense of taxpayers and citizens. Obama seems to have a similar taint. Under either administration, Goldman Sachs and the PEU's win.

The Obama team restarted securitization with taxpayer money. It won't rein in naked credit default swaps. It's fine with speculation on energy, which turns gasoline into a dollar hedge instead of a driving fuel. And it flat out loves private equity, the solution for banking, infrastructure, education and health care.

The PEU boys are plenty big enough, interconnected enough and risky enough. The government writes plenty of checks to PEU affiliates. Every now and then PEU's return the favor.

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